By Richard Gatto
Executive Vice President-The Alter Group
Downtown is back as the first spec building since 1998 gets under way. McDermott, Will & Emery leased 225,000 square feet at the 41-story 444 W. Lake, which got the green light to start construction. It is a sign of how much the market has improved that the building failed to get underwritten with 640,000 square feet of leases as recently as 2009. Clearly investors have faith in the strength of Chicago as a major business and cultural capital.
The downtown office market is still being driven by the resurgent tech and professional services sectors, including law firms. According to Transwestern, 23,000 of the 29,000 jobs created in metro Chicago in 2012 were in the professional services. Although the reported vacancy rate remains relatively flat at 14.9 percent in the fourth quarter, according to statistics from CBRE Inc., the numbers are actually better if you consider that they don’t include Google Inc.’s 572,000-square-foot lease at Merchandise Mart for its Motorola Mobility unit that is relocating from Libertyville.
The numbers do include the Sara Lee deal at 400 S.Jefferson, a 230,000-square-foot building in the West Loop. CBRE is reporting net absorption of just 69,935 square feet for last year (compare that to the pre-2007 market when it was routinely in the millions of square feet), mostly because of all the old-line companies reducing their footprint to lower cost. For example, Citadel will only renew 222,000 square feet when it’s existing 325,000-square-foot lease expires in 2013.
The big stories? The continuing migration downtown from the suburbs as companies chase the highly skilled knowledge workers who want to rent in places like River North and the West Loop. Proof of this trend continuing is the fact that there are 1,500 apartments planned for River North alone – $500 million of new construction that would double the housing supply in that prized neighborhood. Another 192 units are planned in the West Loop, one of the country’s hottest residential and restaurant districts. It’s not surprising to see so much new multifamily construction when you consider that occupancy rates are 95 percent.
A number of headquarters relocated downtown in the fourth quarter including GE Transportation, which will join GE Capital at 500 W. Monroe St. with a 54,000-square-foot lease; The Marketing Store Worldwide, which signed a 31,000-square-foot lease at 55 W. Monroe St., increasing their CBD presence; and Bike gear maker SRAM International Corp., which moved its HQ to 70,000 square feet, in the former Fulton Market Cold Storage warehouse, which will be converted to offices by 2014. The largest new signing in the fourth quarter was a 136,678-square-foot deal by accounting firm Grant Thornton LLP at the former Chicago Title & Trust Co. building at 161 N. Clark St, moving from 175 W. Jackson Blvd. Capital One Financial Corp., meanwhile, finalized a deal to sublease 65,484 square feet at 77 W. Wacker Drive from United Airlines.
On the investment side, the market was flooded with capital chasing yield at a time when capital is cheap and T-bills are at historic lows. Fifty transactions closed in the city worth $2.2 billion with half of that closing in the fourth quarter. That’s an average cap rate of 6 ½ percent. Part of the late rush to sell was motivated by the jump in capital gains passed by Congress as part of the fiscal cliff deal.
Richard Gatto is executive vice president of The Alter Group (www.altergroup.com) In this capacity, he manages the company’s 3 million square feet of development nationally, including its new West Loop tower, 625 W. Adams (www.625westadams.com), a new 490,000-square-foot, 20-story office building.